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Dirty Dozen tax scams released by IRS

WASHINGTON (2/2712)--As credit unions help consumers with tax preparation under the Internal Revenue Services' Volunteer Income Tax Assistance (VITA) and Earned Income Tax Credit (EITC) programs, they will need to make their members aware of a new list of tax scams released last week by the IRS.

The VITA Program offers free tax help to people who make $50,000 or less and need assistance in preparing their own tax returns.

The EITC is refundable federal income tax credit for low- to moderate-income working individuals and families.

Identity theft. Responding to growing identity theft concerns, the IRS has focused on preventing, detecting and resolving identity theft cases. In addition to the law-enforcement crackdown, the IRS stepped up its internal reviews to spot false tax returns before tax refunds are issued. The agency also is working to help victims of the identity theft refund schemes.

Phishing. Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Tell members to keep in mind the IRS does not initiate contact with taxpayers by e-mail to request personal or financial information.

Return preparer fraud. Questionable return preparers have been known to skim off their clients' refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Tell members to choose carefully when hiring a tax preparer.

Hiding income offshore. While there are legitimate reasons for maintaining financial accounts abroad, reporting requirements must be met. U.S. taxpayers who maintain such accounts and do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, and the possibility of criminal prosecution, said the IRS.

"Free money" from the IRS and tax scams involving Social Security. Scammers prey on low-income individuals and the elderly. They build false hopes and charge people good money for bad advice. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. Warn your members to remain vigilant.

False/inflated income and expenses. Including income that was never earned, either as wages or as self-employment income to maximize refundable credits, is another popular scam, one that could have serious repercussions.

False Form 1099 refund claims. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. Members should be advised not to fall prey to people who encourage them to claim deductions or credits to which they are not entitled. Nor should they willingly allow others to use their information to file false returns.

Frivolous arguments. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law, said the IRS.

Falsely claiming zero wages. Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Members should resist participating in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Abuse of charitable organizations and deductions. IRS examiners continue to uncover the intentional abuse of charitable organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets--including situations in which several organizations claim the full value of the same non-cash contribution.

Disguised corporate ownership. Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering, and financial crimes.

Misuse of trusts. IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, urge members to seek the advice of a reputable professional before entering a trust arrangement.